Getting match fit for recovery
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Business rules management techniques could help lenders get in shape for the better times to come, says Geraint Chamberlain, head of consultancy at Target Group
Geraint Chamberlain
As we start to see a few green shoots of recovery lenders will want to ensure they are match fit to face the challenges ahead.
But they face a dilemma - should they take the cautious approach and wait until the market fully recovers before investing in enhanced people and process performance or pre-empt the upturn by investing in lending infra- structure now? When is the right time to take this leap of faith - or is there ever going to be a right time?
Add into the mix growing uncertainty around interest rates and increasing legislative constraints such as the European Consumer Credit Directive and the Financial Services Authority’s Mortgage Market Review and you have a management minefield.
Against this backdrop one of the key challenges will be to stay flexible while retaining business control.
The ability to originate new loans will be critical and having the correct support processes in place will be key. Lenders that act now to align their people and processes with change are the ones most likely to prosper in the new world.
The CCD will increase the need for robust systems while changing market conditions will also ramp up the pressure on lenders to provide more in-depth business reporting on portfolio performance to their backers.
But how can existing systems better support people and businesses? The answer lies in three words - business rules management.
BRM is not a new phenomenon but only recently have lenders caught on to the benefits this solution provides.
Most organisations currently have either electronic document management or business process management in place but BRM is the glue that can bind the two together.
BRM is cost and time-efficient, and offers lenders enhanced flexibility together with more control. For example, it can control the flow of work or change a firm’s product features, risk policies and lending strategies.
Where BRM provides additional value is that it is user-friendly and intuitive to use. It also removes the need to involve complicated IT processes to recode incumbent legacy systems.
Ensuring that your systems effectively support your business means you can free up staff to concentrate on originating new loans.
I see BRM technology as a big growth area for 2010 and a key driver in optimising business performance in the new lending world.
The current lull in the market presents the opportunity for managers to plan for the future. Their focus should be on reviewing, selecting and implementing the right automation solutions if they wish to protect and retain their competitive edge.
I anticipate increasing demand for transparent underwriting and sophisticated arrears management processes including early warning systems in the next phase. And it will be the lenders that fully embrace change that will emerge in best shape.
What the CCD could mean for lenders
The European Consumer Credit Directive aims to guarantee a high level of consumer protection and to harmonise certain aspects of laws, regulations and administrative provisions across the European Union. But with the UK government still finalising the details the full extent of the impact on lenders remains unclear.
What is clear is that the June 11 deadline for lender compliance is fixed and prudent firms must consider the effects on their business and adapt accordingly. The more agile a lender is in adapting to these changes the better its long-term performance will be.
In terms of loan origination the new rules are likely to place a significant burden on lenders to lend even more responsibly. The main effects will involve four factors.
Pre-contractual and contractual information
The CDD obliges credit institutions to provide consumers with exhaustive information using an approved format known as Standard European Consumer Credit Information.
Before the conclusion of the credit contract creditors will have to verify consumers’ creditworthiness on the basis of information obtained from consumers and where necessary on the basis of a consultation of appropriate databases accessible in all member states, particularly in the case of cross-border credit.
How this will affect existing niche lenders that specialise in credit provision for UK immigrants remains to be seen. Will we see big lenders cannibalising niche territory or, as this is not a compulsory requirement, will they simply take a business-as-usual approach?
Right of withdrawal
Consumers will have a period of 14 calendar days to withdraw from credit agreements. But this period may be reduced at the explicit request of a consumer to correspond to the specific period provided for in member states’ legislation.
Also, a provision clarifies the relationship between the right of withdrawal and other directives.
From a new loan origination perspective, lenders will need to adapt existing documentation and processes to comply.
Early repayment
The new provisions give consumers the right to repay any credit they have taken out early and also lay down rules for the calculation of compensation.
Creditors will be entitled to claim compensation provided repayment falls within a period for which the borrowing rate is fixed and where the reference interest rate at the date of repayment is less than that in force at the date of the conclusion of the credit agreement.
Again, in terms of originating new loans internal processes will need to be upgraded and a full pricing review undertaken.
Indication of annual percentage rate
Creditors are obliged to specify the annual percentage rate. Under Article 4 (information to be included in advertising) and Article 5 (pre-contractual information) the borrowing rate plus charges together with the percentage rate of charge must be specified.
